Tuesday, August 11, 2009

No True Recovery Anytime Soon

Contrarian economic analyst Bill Bonner of the Daily Reckoning writes:

Yesterday, we estimated that it would take 19 years for the economy to
complete its de-leveraging. It was not a very scientific estimate. But total
debt has gone down about $2 trillion over the last 24 months. So, if it
continued at that rate, it would take about 19 years to erase the extraordinary
amount of debt built up in the bubble years.

Now, along comes the Comstock crowd with roughly the same guess - two
decades. They figure that the savings rate will go up to 10% and that the effect
of taking that money out of the consumer economy will be to put the United
States into a long, soft slump - just as we predicted in our first book.

And there's another reason to expect a very long period of downsizing:
that's just the way economies work. Market cycles are very long. Interest rates
went up from the Great Depression all the way to the Reagan Administration.
Then, they went down...and may still be going down. Stocks go up and down in
cycles that last 30-40 years, peak to peak. The peak in '29 was followed by
another peak in '66, which was followed by another peak in '99.

Economic cycles are long too. Consumer debt, compared to disposable income,
hit a low in 1945. It went up for the next 62 years. It only peaked out in 2007.
If the chart were symmetrical, the process of deleveraging (getting rid of debt)
would show a downtrend until 2069! And maybe it will.

But there's no point in looking that far ahead. What we have in front of us
is the opening stage of a depression...a market crash followed by a major
economic re-adjustment. The new reality is that consumer demand is down...and
will stay down for a very long time, at least until debt has reached more
manageable proportions. Ken Rogoff says that will take 6-8 years. We say it
could take 19 years. There's about $20 trillion in excess private sector debt to
be eliminated. It will take time to get rid of it.

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